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Special Rules on FICA Taxes for Nonqualified Deferred Compensation Plans

Special Rules on FICA Taxes for Nonqualified Deferred Compensation Plans

Author Executive Benefits Team
Date February 11, 2014
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WRMarketplace An AALU Washington Report

Failure to Follow Special Rules on FICA Taxes for Nonqualified Deferred Compensation Plans Can Lead to an ERISA Claim

MARKET TREND: Financial and tax planning considerations have made the use of nonqualified deferred compensation vehicles increasingly popular. While these arrangements generally result in the deferral of income taxation until the time at which the deferred compensation is paid to the plan participant, special rules under the Internal Revenue Code (“Code”) require that FICA taxes (i.e., Social Security and Medicare) be paid at an earlier time and emphasize the importance of proper plan administration.

SYNOPSIS: In Davidson v. Henkel, an employer maintained a supplemental retirement plan for the benefit of certain employees under which it promised benefits based on the amount that would be payable to a participant under the employer’s tax-qualified pension plan. The employer did not withhold and pay FICA taxes at the time they were due under the Code and, instead, paid these taxes at the time of each benefit payment. This approach resulted in the participant owing more in FICA taxes than he would have if the employer paid these taxes timely, thereby reducing the net benefit payable to the participant. The participant sued the employer for the lost benefit, and the employer filed a motion to dismiss the participant’s suit for failure to state a claim. The court found that the participant’s complaint did state a claim for benefits.

TAKE AWAY: Failure to properly administer a nonqualified plan, specifically with regard to the special rules governing the FICA taxation of these arrangements, may result in significant additional FICA tax liability to the participant and employer, as well as expose the employer to possible benefit claims.

REFERENCE:  Davidson v. Henkel (Case No. 12-cv-14103, filed July 24, 2013, United States District Court for the Eastern District of Michigan, Southern Division).

DISCLAIMER

In order to comply with requirements imposed by the IRS which may apply to the Washington Report as distributed or as re-circulated by our members, please be advised of the following:

THE ABOVE ADVICE WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, BY YOU FOR THE PURPOSES OF AVOIDING ANY PENALTY  THAT MAY BE IMPOSED BY THE INTERNAL REVENUE SERVICE.

In the event that this Washington Report is also considered to be a “marketed  opinion” within the meaning of the IRS guidance, then, as required by the IRS,  please be further advised of the following:

THE ABOVE ADVICE WAS NOT WRITTEN TO SUPPORT THE PROMOTIONS OR  MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED BY THE   WRITTEN ADVICE, AND, BASED ON THE PARTICULAR CIRCUMSTANCES, YOU SHOULD SEEK ADVICE FROM AN INDEPENDENT TAX ADVISOR.

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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through Lion Street Advisors, LLC (LSA) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI and LSF/LSA are non-affiliated entities and separate entities from OneDigital.

Unless otherwise noted, VAI/VSI, LSF/LSA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.

Lion Street Advisors // Lion Street Financial

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